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Recommendations to The Walkerton Water Inquiry

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Recommendations to The Walkerton Water Inquiry Powered By Docstoc
					                  Recommendations

of The Canadian Council for Public-Private Partnerships

                  presented to the
                 Walkerton Inquiry
               Part 2: Public Meeting
           Management of Water Providers
                September 20, 2001




         Presentation by: Hon. Michael H. Wilson,
                      Chair, CCPPP
The Canadian Council for Public - Private Partnerships (CCPPP) Interest in
the Walkerton Inquiry

First and foremost, CCPPP has an interest in seeing infrastructure and service investments keep
pace with the needs of its citizens. The tragedy in Walkerton in 2000 has focused our collective
attention on the state of water related infrastructure in this province and on the methods of
delivery. CCPPP’s first interest is ensuring that all options are explored in that regard.

Secondly, we recognize that it is an increasingly globalized environment within which all
Canadians live and that for Canada to be competitive, it must constantly upgrade its public
services and infrastructure to attract business investments.

CCPPP believes that the capacity of the public sector to meet the accumulative infrastructure
requirements in all sectors is limited and that the instrument of public-private partnerships is
one method of bridging the gap between public sector capacity and the demands being placed
upon it. Our position is reinforced by our exposure to other government-led programs, most
notably the United Kingdom, Australia and New Zealand and increasingly in the EU countries
which support the concept of public-private partnerships and the modernization of their
infrastructure through a variety of such arrangements. South Africa is also well into the
development of a similar program.

CCPPP’s intention is to bring forward to the Inquiry options in the provision of water services to
those traditionally offered directly by municipal organizations either through public departments
or agencies and public utility commissions. The nature of the arrangements that we support
are public-private partnerships rather than privatization.


Our Mandate

The Canadian Council for Public-Private Partnerships is supported by membership fees and
revenues generated through events and research publications. No direct government grants
are received to support our operations although research activity is often undertaken through
partnerships with government organizations. CCPPP works on a national platform and draws
members in almost equal numbers from the public and private sectors. We work very closely
with governments across Canada and support them through the provision of expert advice and
research materials. The CCPPP Board of Directors is made up both of public and private senior
representatives as well as union representation.

With interest in the particular issues before the commission would be our members
representing the following:

   •   Municipalities, some with private operators, many looking at it as an option.
   •   Provincial governments throughout Canada
   •   Engineering and technical consultants both to public and private clients
   •   Private water companies
   •   Construction companies
   •   Management consultants working in the environmental field as advisors to both public
       and private sectors
   •   Financial and legal advisors to both sectors

Background

CCPPP has been involved in the Inquiry in a number of ways:

In January 2001, CCPPP submitted a report to the Inquiry entitled “A Submission to the
Walkerton Inquiry (Part II) Concerning Alternative Models of Water Systems with Private Sector
Involvement”. A companion document entitled “Overview of Successful Public-Private
Partnerships in the Water Sector” accompanied the submission. The former is posted on the
Inquiry’s website for viewing. The latter is a very important piece of research conducted by
CCPPP which examined nine North American water and wastewater projects looking at financial
savings to the municipalities, public satisfaction with the private sector operations taking into
account such considerations as the impact on water rates, quality of service and so forth. Each
project carries a testimonial from either an elected representative or a senior works
commissioner with direct knowledge of the individual project’s performance. This publication is
not posted on the website for technical reasons but is critical to appreciating the position of
CCPPP.

Appearances were also made at the technical meetings of June 20 and July 5. In addition to
technical advisors, CCPPP was accompanied to the meetings by Mayor Brian Murphy and City
Manager Al Strang, City of Moncton (June 20 Meeting) and Mayor Deb Shewfelt, Town of
Goderich (July 5), who shared the experiences of their respective communities in public-private
partnerships in water delivery.

In addition, CCPPP sought the input of Ofwat (Office of Water Services) in the United Kingdom
to comment on the CUPE commissioned report on the UK Water Privatization recognizing that
certain errors were presented within the Hall report and required correction and clarification.
As the economic regulator of privatized water services in the UK, only Ofwat could accurately
identify misrepresentations or misinterpretations within the report. The response provided by
Director General Philip Fletcher appears on the Inquiry website as a communication between
him and the Executive Director of CCPPP. Again, this is a valuable contribution to the
understanding of how effectively the private sector has been involved in the provision of water
services.

The CCPPP position on all matters related to the development of a future water delivery system
for Ontario are captured in those various documents and summaries of discussion. Our
purpose by way of this submission is not to revisit the detail of those individual documents.
Rather our intention is to offer some concluding thoughts based on our research and technical
knowledge of private sector operations in the water field.
Sound System of Water Delivery

The overall objective is first and foremost to achieve a sound water delivery system, one in
which all factors contributing to the achievement of that system are free from influence or
conflict that could potentially negatively affect overall performance of the system. Ensuring
that all the components that have to interlock are in place is the first goal: the setting of water
quality standards, non-performance detection responsibilities, enforcement capabilities, etc. All
of these should be in place regardless of whether a private or public model of delivery is
contemplated.

Within that context, we think there are a number of considerations to ensure the integrity of
any system. These relate to the division of responsibility in the establishment of water quality
standards & regulations, the enforcement of the standards, the financing of water systems and
the elimination of conflicts with water treatment and delivery.

A great deal of discussion has already taken place throughout the hearings into these matters
and carefully considered by experts advising the Commission. We, therefore, want only to
reinforce the position that separation of each of these activities is warranted. Integrity of the
system can only be achieved when conflicts of interest are removed such that each activity
functions with clear objectives unfettered by extraneous considerations achieving other
unrelated goals.

Water quality standards should be established to ensure safe potable water is available to our
citizens. Supportable standards should not be compromised because of the recognized costs to
achieve the standards. Performance of all systems should be monitored, whether public or
private. Violations should be identified and violators dealt with fairly and consistently.
Complications arising when the regulator is also the operator need to be eliminated. Similarly,
the decision to set standards or enforce standards cannot be conflicted by the obligation to fund
the upgrade to equipment or service to achieve the standards. When all these functions reside
within the government or in an agency of the government, the potential for conflicts exist.

These are matters outside of the mandate of our Council and therefore our comments are
offered only as observations rather than recommendations.


Public-Private Partnerships as an Option

The Canadian Council is, however, very well positioned to comment on the benefits that we
have seen when public - private partnership models for delivery are utilized. It is our intent to
offer assistance to the Inquiry as it looks to solutions in creating a future sound water delivery
system in this province.

A commissioned paper of the Inquiry prepared by Professor David Cameron of the University of
Toronto explored the relationship of ownership and operations and performance. He concluded
that actual ownership as a characteristic itself appeared to be relatively unimportant in the
achievement of good water quality. Rather, other factors such as “the skills and training of the
staff, the overall management systems that have been put in place, the state of development of
water engineering and water technologies, the condition of the infrastructure, the existence of
effective monitoring capability and adequate feed-back loops” are the factors that determine
the quality of water being delivered to citizens in any given jurisdiction.

This finding supports much of our own research. For those matters within the scope of
operations and physical assets, we believe that the achievement of a sound system is very
much dependent upon the ability to finance the physical plant for water treatment and
distribution systems and on the availability of highly trained staff with access to state of the art
technology and innovation to operate it.

The Canadian Council for Public-Private Partnerships would suggest that there are factors
influencing private sector organizations that compel them to consider the above characteristics
somewhat differently than a public sector organization would. Based upon our research and
upon our considerations of those factors which reflect some of the influences and drivers of
private versus public businesses, we believe that there is a clear role for the private sector to
play in the achievement of a sound water deliver system for Ontario and we, therefore, make
one recommendation to the Inquriy:


RECOMMENDATIONS

That the Walkerton Inquiry recognize the benefits that can be derived from public-
private partnerships in the water sector through the private sector’s participation in
a spectrum of activities including finance, design, build and operation of water
treatment facilities and distribution networks.

That the Walkerton Inquiry include within its recommendations to the Government
of Ontario the increased reliance on public-private partnerships as an option to
public sector delivery.

Financing

One of the areas in which the private sector has made the greatest impact is in the actual
financing of water infrastructure. As Dr. W. H. Emery, Director General of Ofwat points out in
his letter (July 18, 2001) on the modernization of the British water and wastewater system,
between 1990 and 1999 capital investment made by the private sector to deliver higher water
quality and sewage treatment standards set both nationally and at a European level, was close
to £ 33 billion (May 1999 prices). By 2005 that investment is projected to be in excess of £50
billion. This level of investment was not remotely within the ability of the public sector and
most would agree that the private sector is responsible for the modernization of a deteriorated
public system in that country.

Within the Canadian context, we have seen the partnering of the public and private sectors
solve a long time problem in Moncton, New Brunswick. Mayor Brian Murphy and City Manager
Al Strang accompanied CCPPP to the June 20 Inquiry meeting to discuss their experience. For
many years Moncton chlorinated its water supply but did not meet the Canadian water quality
guidelines for drinking water. Boil water orders were becoming increasingly common. Citizens
in random sample surveys consistently recognized low water quality as the leading municipal
service issue.

In 1995 they estimated a cost of $32 million to provide a solution by way of a new treatment
plant. They did not have the financial capacity to undertake the project and the future did not
suggest that they would any time soon. They turned to the private sector through a
competitive proposal process to develop a partnership with a private sector partner. In 1999 a
new plant was up and running in Moncton delivering one of the highest water quality standards
in this country. For $23 million ( $11 million less than if delivered traditionally by the public
sector) a private company had entered into a public - private partnership (Design Build Finance
Operate) with a 20 year lease-license agreement with the full operation of the plant provided by
the private sector. Water rates are established by the public sector. Regulations are imposed
by the public sector.

This has been such a success and solved such a critical problem for the municipality that they
are currently examining the feasibility of turning the refurbishment of the aged distribution
system
(some parts of which are 122 years old) to the private sector with an estimated private sector
investment required of $70 million.

Many other examples can be drawn from across North America and Europe as developed
nations and clearly public - private partnerships are a standard instrument in achieving
infrastructure investment and operations in developing countries, becoming almost the
exclusive method used now in World Bank projects.

No comprehensive study has been completed to date to accurately reflect the infrastructure
investment deficit and the future requirements in water and wastewater systems across
Canada. Such a study is needed because it will help to focus the discussion. However, a study
conducted by the Federation of Canadian Municipalities in 1996 estimated the investment deficit
at $44 billion for water supply services and $9 billion for sewage treatment in Canada. It
could be reasonably expected that these figures would be higher today.

CCPPP does not believe that the public finance capability in Ontario and certainly across Canada
can address this infrastructure and service investment deficit and future requirements using
government sources alone. In water and wastewater services, we question the accuracy of any
studies that suggest Ontario municipalities currently have the financial capacity to address this
investment deficit recognizing that the full costs to do so have not yet been determined.

Operations

The private sector has most commonly established itself across North America as operators of
water and wastewater treatment facilities. This is gaining in popularity in the USA and
observers of this particular industry report that more and more municipalities are exploring
public - private partnerships as an alternative to traditional public sector operations. An
indication that satisfaction is being achieved is the high level of contract renewals that are being
signed.

Many North American municipalities have found the public - private model of delivery better
meets its obligations to operate a highly efficient and technically sound water treatment and
wastewater systems than their traditional model of delivery. In terms of cost efficiencies alone,
estimates by consultants working in this field are reporting savings in the range of between
30% and 40% over traditional public sector deliver.

Why are the efficiencies achieved by the private sector so great and how is it possible?

The benefits of using the private sector are explained in detail in the CCPPP January 2001
submission to the Inquiry. However, briefly, CCPPP believes there are a number of
characteristics of private sector operations, as mentioned above, that position them to focus on
efficiency and risk reduction which ultimately produces sound delivery systems. The first of
these characteristics relates somewhat broadly to the nature of private enterprise in general but
also specifically to private water companies.

Non-performing water companies fail to thrive. There is no such thing as a second chance
when a water company fails to perform. They go out of business. There is no tolerance for
error when it comes to the delivery of safe drinking water - either internally within the company
or externally from the clients. Water companies want to survive. Everything within the
company is designed to ensure that they continue to survive. And it starts at the top with their
governance structures.

Municipally run water and wastewater facilities are most commonly overseen by some type of
body made up of political appointees or the political representatives of the municipality -
through a committee structure and Council or formally, through a public utility board. They are
people elected to oversee the vast number of activities being performed by their municipal
organizations or boards, being experts often in no individual area. Typically those represented
on the oversight bodies have no technical background in water systems.

This stands in sharp contract to the management boards of private water companies. The
Boards of Directors or Management Boards of larger water companies would typically have
expertise from either the technical or management side of the water business. For example,
one board that we examined had 5 of 9 board of directors who had come up through the ranks
of the water industry prior to appointments on the board. This ensures that the oversight of
the management of operations throughout their portfolio of contracts is technically able to
judge the level of quality of the service being delivered. They are charged with the
responsibility to ensure that the private company thrives.

The point should also be made that non technical directors drawn from the fields of
management and finance also add depth and balance to the technical representatives on the
Board in ensuring that health, safety and environmental issues receive strong consideration.

As a first consideration we would conclude that the latter model of oversight carries a higher
degree of professional competence than the government model. As a result, it is positioned,
from a governance perspective, to achieve a higher quality operation and greater assurance of
water quality provision.

The second consideration is how a private sector evaluates and manages risk versus a public
sector provider. Anything that jeopardizes a private company’s ability to perform is considered
a risk. Inadequately trained staff, malfunctioning equipment, faulty infrastructure and so on
are unacceptable risks in the business of private sector water operations. So referring back to
Prof. Cameron’s findings, those characteristics of systems that are more likely to ensure good
quality operations, are the factors that if mismanaged create risk. Risks are minimized at every
opportunity to ensure the integrity of the service being offered. Operations and standards are
monitored on an on-going basis to ensure that top performance is being achieved and that the
potential for failure is minimized or eliminated.

(Risks in the public sector are often not given the same consideration. There is an inherent
cost to any organization that assumes risk - be it public or private. Increasingly in discussions
being conducted by governments looking at “value for investment” considerations in many
countries, risk is often not quantified as one of the costs being borne by government and it
should be. When the public sector delivers a service, either directly or through an agency of
the government, risk is being assumed and should be valued and treated as an expense of
operation.)

Performance contracts which penalize non-performance result in financial loss. Catastrophic
failure, such as feeding contaminated water into a municipal distribution network resulting in
deaths, would result in bankruptcy. Because the company’s very survival is based on its
performance, the focus on service quality is sharpened.

Consistent with the objective to reduce and minimize risks while at the same time building
efficiencies into their operations, many private water companies invest heavily in research
and development activities which bring improvements on a technical and operational level to all
operations throughout the network of contracts worldwide. Mr Deb Shewfelt, Mayor of
Goderich, Ontario accompanied CCPPP to the July 5, 2001 Technical meeting of the Inquiry and
made the point that when his municipality articulated what it felt it needed to ensure that high
quality water would be available for its citizens, access to the best technology and research
available rated very high on their list. Running the municipal water system themselves meant
operating in isolation without the benefit of immediate access to new technologies and to new
technical information. Many of the larger water companies have that capacity within their
organizations.

These two sets of factors, the nature of enterprise and the management of risk through all
factors including governance, research and technology, training of staff, and so on, in
combination compel private sector operations somewhat differently than public sector
operations and bring benefits to municipalities that have selected private sector partners. This
is not to say that other factors, for example political accountability*, are not a compelling driver
to municipally operated systems but rather that the factors that drive private companies are
perhaps more transparent in as much as their objectives are extremely clear - to thrive, to
maintain a reputation as a high level performance company from the users’ perspective, to
establish a growing client base based on past performance and to get a return on an
investment.

Clarification of what a private operation means to the municipality

There is a great deal of misinformation about what it means to involve a private sector
company in a municipal operation. The following clarifies some of the more common myths
that are raised by opponents of PPP.



*It should be noted that Mayor Shewfelt of Goderich made a representation before the Technical Hearings of the
Inquiry on July 5, 2001 and submitted that political accountability is in no way diminished when contracting a service
provider over delivering the service directly.

Water Rates

Let us examine what an operating contract is versus what it is not. First, it does not take away
any ability of the public sector to set the water rates. That responsibility falls within the domain
of the public sector and resides there as their sole responsibility. On a long term contract,
water rates may well be determined for the entire length of the contract and therefore provide
predictable long term certainty about the costs being allocated to each household barring any
unforeseeable circumstances. They are established by the public sector and politically
determined by the public sector.

Ownership of the Water Related Assets

Secondly, a public - private partnership (as opposed to the privatization model) does not take
the ownership of the facility out of the hands of the public sector. Most commonly in North
American models, the public sector continues to own the physical asset and depending upon
the terms of the contract, determine in partnership with the private sector the level of
investment in the capital plant and technology to keep the plant in a good state of repair.

In some contracts, this would be the responsibility of the private sector and the contract would
specify the performance standard to be met on the condition of the plant.


Impact on Existing Labour Force

Thirdly, it does not mean that all the municipal / public - utility staff currently operating the
plant would be fired and that the private operator would bring in staff from outside to operate
the plant. Logic would dictate and practice would confirm that the people who best know the
plants are the ones who currently operate them. Efficiencies come through increased training,
technological improvements, procurement practices, etc. The protocol in the industry is to
transition the bulk of staff (in many cases all of the staff) over to the private sector organization
maintaining similar benefit packages to those offered by the public sector and often maintaining
the pension plan through arrangements made with the public pension system such as OMERS in
Ontario. Labour has not proven to be the source of the savings achieved in most operations in
North America.

Related to this is the misunderstanding voiced by a number of union participants at the
technical meetings that the operator brings in people to staff the plant from outside therefore
suggesting that these people are not people “from the community - not your neighbours”.

This is a misunderstanding. The private sector would have no reason to import people from
outside, nor would they be likely to want to incur the expense of relocations. The plant workers
live in the community. Chances are the majority of them are the same people who worked in
the plant when it was a publicly operated facility. To suggest that “outsiders” take over and
therefore are not committed to the plant is erroneous in all respects.


Control of the Water Delivery System

Thirdly, opponents of public-private partnerships in water operations would suggest that there
is a loss of control to the municipality when a private operator takes over. This is not factual.
Mayor Shewfelt explained in detail his council’s considerations in this regard before entering into
a long term operating contract with a private supplier for the Goderich system. He concluded
by saying that in fact he believed that there is more control using a private sector operator than
a public operator because the contractual agreement between the supplier and the provider
specifies the exact expectation of the municipality on the private sector, something that would
not be articulated as well with your own staff.

Furthermore, penalty provisions are outlined in detail should a supplier not perform at the level
specified within the contract. Again, such clear guidelines do not exist with an in-house
provider. Non-performance remedies, in any case even if they were contemplated to apply to a
public operator, would fall squarely back on the same municipality. Many would suggest that
the existence of a clearly written contract with a clear set of penalties for non - performance
make private sector operations more accountable than public systems and more transparent.


Free Trade Issues

Opponents of PPP have recently made a concerted effort to distort the terms of international
trade agreements to suggest that the contracting of private operators in this sector (investors in
the language of the agreements) can impact a municipality (sub-national in the language of the
agreements) so that they lose control of their ability to manage the contract, to make changes
to conditions in the terms under which the contractor operates, to make changes in the
standards (for example water quality standards provincially determined), etc.

A separate submission to the Inquiry will be made on behalf of CCPPP in this regard. Suffice to
say that CCPPP has been in extensive discussions with the Department of Foreign Affairs and
International Trade (DFAIT), Industry Canada, numerous law firms with international trade
agreement expertise and concludes that there is no substantive evidence to give credence to
these allegations. They distort the intent of the agreements (specifically the intent of Chapter
ll of the North America Free Trade Agreement) and endeavor to create an atmosphere of
uncertainty in doing business with international suppliers. Based on all information and expert
advice being received by CCPPP, these assertions should be recognized for their true intent.
DFAIT has embarked on a cross Canada tour of meetings with the municipal level to clarify the
agreements and to satisfy concerns that may have been raised by the opponents of free trade.

Conclusions

There have been demonstrable successes in the private delivery of water throughout the world
and more relevantly in North America. These partnerships can take on a number of
characteristics depending on the needs of the region or community. In the case that the
community requires improvements or development of infrastructure (plant, distribution system,
etc.) and lacks the financial capacity to address the problem, the private sector can participate
as a financing partner. This in combination with Design/Build expertise has proven to
deliver infrastructure well under typical costs achieved by the public sector through traditional
procurement. When the objective of the public sector partner is to ensure the quality of
operation, the private sector can act as the systems operator within the publicly administered
system. The various models are outlined on pages 4 through 7 in our submission dated
January 30, 2001 which is posted on the Walkerton Inquiry website.

The Canadian Council for Public-Private Partnerships encourages those charged with the
responsibility to look to improvements in the future model of service delivery in water in Ontario
to consider the greater use of public - private sector models for the benefits that they have
proven to bring in financing, design, build and operations.

				
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